One of the UK's best-known investors is buying flats in Germany.
A property company trading at a big discount to net tangible assets has to be worth a second look. Such is the case with Speymill Deutsche Immobilien Company (LSE: SDIC) a German residential real estate company in which the famous investor Jim Mellon has an 11.4% interest.
Any investment by Jim Mellon has to be taken very seriously. After all, this is the man who made a number of very specific predictions in his books "Wake Up!: Survive and Prosper in the Coming Economic Turmoil" and "The Top 10 Investments for the Next 10 Years". In Wake Up! (2005), he predicted the US housing crisis and credit crunch as well as high and volatile oil prices.
In an interview in The Times a couple of months ago, the man who sees the economic future in his tea leaves was asked the question: "Is it time to buy property again?" to which he replied: "For the past four years, my main interest has been in German property. I'm very bullish on property there and it's by far my biggest investment -- about 70% of my wealth is going into it." As you may imagine -- he's not quite so bullish on UK property; quite the opposite in fact.
Discount to assets
Sure enough, SDIC's valuation seems to make little sense. Its net tangible asset value (NTAV) is close to three times the current valuation of the company, despite the fact that NTAV has decreased by only a relatively small amount. The company owns over 26,000 apartment units, a sizeable proportion of which are located in and around the 15 largest German cities.
Even more interestingly, SDIC believes that German residential values in its portfolio, which are currently 40% below the building cost (excluding any value for land), will converge with the cost of construction in the medium to long term.
Part of the reason for the big discount to NAV seems to be the perception of too cosy a relationship with Speymill (LSE: SYG) in which Jim Mellon also has a large shareholding. Speymill takes fees from SDIC in return for identifying acquisition opportunities.
And opportunities there are; German real estate is famous for being cheap relative to the other big economies of Western Europe. In fact, prices have barely budged in two decades and many investors have bought in too early in the belief that it will play catch-up. The particularly appealing thing about SDIC, though, is that it doesn't need German real estate to rise in order to be cheap; it already is.
Not quite so easy
The final results to the end of June, though, weren't exclusively good news by any means. The overall property valuation fell by 2.9%, and the EPRA (European Public Real Estate Association) net asset value fell 13% year-on-year to €0.92 per share.
But this still compares highly favourably to the current share price of just €0.31. The company was also experiencing higher than normal rent arrears, for which it has since appointed a specialist agent.
SDIC reported a headline heavy loss, but this was mainly due to the effect of interest rate swaps. Using the more telling measure of funds from operations, SDIC reported a small loss, though the broker expects a profit of over €6m next year.
SDIC's debt, meanwhile, is fixed for 5 years at 4.7%, whilst their rental yield is over 6.5%. This figure should rise as they've refurbished their estate. Also, as the refurbishment programme progresses, vacancies are forecast to reduce which should have a positive impact on the portfolio value.
The future
IF German real estate even begins to play catch-up in even a small way with the rest of the western world, then NAV and share price could really start to motor. But as things stand, the company already looks unfairly tarnished with the same brush as other property companies. In fact, it's even worse. In a few cases, share prices are equal to or even exceed NAV. This may be a realistic valuation for SDIC, but as things stand, the extreme opposite is true.
The company isn't paying a dividend yet as it isn't cash-flow positive. As and when this changes, the share price should benefit.
All in all, SDIC looks like a solid long-term bargain to me that will grow over the next few years (possibly quite quickly) and has very limited downside. So if you fancy having the yuppie Wolfgangs and Heidis of the future paying for your retirement -- take a closer look.
More share ideas from David Holding:
David owns shares in SDIC.
